How a Cross Border Fee Can Impact Your Small Business
In today’s global marketplace, countless international credit and debit card transactions take place daily. Most of these cards come from domestic issuing banks.
However, customers often purchase merchandise from merchants in other countries. Financial institutions incur more risks from these cross-border payments, spurring them to charge extra transaction fees.
Statista predicts that, in 2022, the business-to-business sector will likely see the largest cross-border payments volume. Meanwhile, INETCO predicts that global cross-border payments in 2022 will be $156 trillion.
In this article, we’ll take a look at what a cross border fee is and what it means for merchants.
What is a cross border fee?
A cross border fee, or international service assessment fee, is one of many credit card processing fees.
The fee applies during a credit card transaction involving two different countries. A US merchant may accept payments from customers whose card-issuing banks are domiciled (or registered) in another country.
A credit card network, such as Mastercard, Visa, Discover, or American Express, charges this non-negotiable fee to a credit card processing company. The processor may decide to absorb this expense or pass it along to the merchant who sells the merchandise.
Origin of cross border fees
A cross border fee is a relatively new component of credit card processing operations. Visa and Mastercard first implemented cross border fees in 2005.
The issuing bank charges this assessment fee, which is funneled to the merchant for using the international credit card processing service. This fee is charged even if no currency conversion takes place.
Prior to 2005, each credit card processor assessed a currency exchange fee to compensate for international transaction costs. However, clever e-commerce merchants quickly found two ways to avoid getting hit with the fee.
- Some sellers selected a merchant’s bank (or acquiring bank) that offered processing in multiple currencies.
- Other small business owners advised their foreign customers to patronize a local business in their home country. It would often be relatively easy to find stores that stocked the e-commerce company’s merchandise.
Not surprisingly, credit card networks responded to these fee-avoidance tactics by merchants. Forming loose partnerships with a common goal, these card networks instituted cross border fees. The fees were designed to cover the costs and risks of currency conversion operations.
When does a cross border fee apply?
A cross border fee discussion begins by learning about the infrastructure needed to accept customers’ credit cards. Specifically, each merchant can set up a dedicated merchant account that enables credit card processing operations.
Alternatively, they can sign up with a payment processing company such as Payment Depot. With either method, a merchant will receive the necessary infrastructure and equipment to begin processing credit cards.
Mastercard and Visa consider two factors when deciding whether a cross border fee applies to credit card payments.
- First, the credit card network notes the country in which the business is domiciled. Sales that originate in that country will be called domestic transactions. All purchases from outside that country are considered foreign transactions and will incur a cross border fee.
- Next, credit card companies look for the card-issuing bank’s location. If the credit card issuer and the merchant are registered in different countries, a cross border fee will apply.
What constitutes a “foreign” transaction?
If a transaction is routed through a foreign bank at any point, the credit card network calls the sale a foreign transaction. Alternatively, this designation can occur if a US resident makes an e-commerce purchase from a foreign merchant. If the sale is shown in foreign currency, it’s considered a foreign transaction.
Although a transaction may take place in US dollars, it may be hit with a foreign transaction fee if routed via a foreign bank. Finally, know that countries such as Ecuador and Panama utilize the US dollar as their currency of choice. However, card transactions from those countries take place outside the US and are subject to a cross border fee.
Some examples of multinational credit card transactions
To illustrate, many Canadian brick-and-mortar stores and e-commerce retailers sell to customers with credit cards issued by US banks. Each Canadian merchant has registered their business in Canada and uses a Canadian merchant account provider.
Clearly, the card issuer and the merchant are domiciled in different countries. Therefore, a cross border fee applies to these card transactions.
In another example, let’s say an Australian tourist is visiting Miami on her annual vacation. She decides to splurge on some beachwear at a Miami Beach boutique and pays for the purchase with a credit card issued by an Australian bank. A cross border fee will apply to this transaction.
Cross-border fee comparisons
Several similar-sounding terms are used to describe fees that apply to international credit card transactions. This brief explanation will put each term into perspective.
1. Cross border fee vs foreign transaction fee
A cross border fee and a foreign transaction fee are essentially the same. This credit card transaction surcharge applies to a purchase routed through a foreign bank. Alternatively, the purchase may be executed in a foreign currency, not in USD. Some banks also charge a foreign transaction fee for an ATM cash withdrawal.
The foreign transaction fee has two components.
- First, the credit card network charges a currency conversion fee that applies to all foreign credit card brands’ transactions.
- Certain card issuers may assess an additional fee. However, some issuing banks may absorb the currency conversion fee without adding another charge.
Not every bank charges a foreign transaction fee. To illustrate, Capital One does not assess a fee to use a credit card for a foreign currency transaction. On the other hand, Bank of America does have a foreign transaction fee for most of its credit cards.
2. Cross border fees vs currency exchange fees
A cross border fee is completely different from a currency exchange fee. The latter is assessed when a payment is converted from foreign currency into local currency (or vice-versa). The currency exchange rate determines the value of each currency. In contrast, a cross border fee applies to the transaction itself.
Can merchants avoid cross border fees?
Unfortunately, all merchants who process international credit card transactions can expect to pay a cross border fee. But there are two potential ways to circumvent this extra charge, each requiring considerable expense and logistics.
1. Sell through local distributors
Let’s say a merchant does substantial business in a specific country. The business may wish to establish a relationship with a distributor located in that country. By fulfilling cardholder orders through the local distributor, the merchant can avoid the cross border fee.
2. Establish a foreign branch
Maybe a larger retailer has substantial sales from a certain country. In that case, they may decide to open a bank account and establish a branch there.
This enables the business to apply for a local merchant account through a merchant services provider. This means they can accept locally issued credit cards without being charged a cross border fee.
Although establishing a foreign business presence sounds like a good solution, it’s a costly and time-consuming process. Merchants should carefully weigh the pros and cons before proceeding down this path.
Cross border fee cost
Each major card network has its own version of a cross border fee. Visa calls it the “International Service Assessment” while Mastercard simply uses the term “Cross Border Fee.” Regardless of the name, this fee generally ranges from 1% to 3% of the transaction amount.
Visa International Service Assessment fee
This fee is structured for Visa credit card or debit card transactions that take place inside the US but the card-issuing bank is located overseas.
The International Service Assessment (or ISA) fee applies to card-present and card-not-present transactions. Currency exchange or currency conversion fees may also apply to the transaction.
Visa says the fee is compensation for the extra effort required to process a transaction through a non-US bank. However, the fee is more likely associated with the increased risk of executing transactions through foreign banks. Although many foreign financial institutions are strictly regulated and stable, others are not.
Note that e-commerce merchants are not immune to the ISA fee. The fee applies when a foreign customer makes a purchase with a card issued within their home country.
Two types of Visa ISA fees
Visa has two types of international service assessment fees.
- The 1% base fee is for transactions in which the merchant’s country of domicile is different from the card-issuing country. These transactions are settled in US dollars.
- Visa’s 1.40% enhanced fee applies to transactions with the same parameters. In this case, however, the transaction is not settled in US dollars.
Visa International Acquirer Fee
Visa charges two fees for using a foreign-issued credit card or debit card in the United States. Besides the ISA fee, Visa tacks on the International Acquirer Fee (or IAF). Both fees are applied under the same circumstances.
Who pays Visa’s international transaction fees?
Visa can’t directly bill merchants for international transaction fees. Therefore, the credit card network passes the fees to the payment processing company.
In turn, the payment processor usually charges the fee to the merchant. This action is determined by the processor’s pricing plan and its policy on passing on these situation-specific fees.
To determine whether the international fees apply, merchants should view the “Terms and Conditions” portion of their merchant agreement. The international fees might be lumped into the “other fees” that the provider may charge to its small business clients.
Mastercard cross border fees
Mastercard’s cross border fees are slightly more streamlined (and less objectionable) than Visa’s fees. Mastercard lists two types of international transaction fees. The card network may also charge other types of assessment fees.
- Mastercard US cross border USD fee. Mastercard charges a 0.60% fee for a transaction in which the merchant’s country of domicile differs from the card-issuing country. These transactions are settled in USD.
- Mastercard US cross border non-USD fee. Mastercard assesses a 1.00% fee for transactions in which the merchant’s country of domicile is different from the card-issuing country. Here, the transactions are not settled in USD.
American Express international assessment fees
American Express does not have a clearly defined international fee structure. The credit card network assesses a flat 0.40% cross border fee. However, this fee may be included with other international assessment fees. Merchants who accept American Express cards should contact the card network for more details.
Discover international service fee
Discover assesses a 0.80% international service fee for US-based sales. For these transactions, the card-issuing bank is domiciled outside of the United States. Note that this fee does not apply to the “cash over” portion of the transaction.
How payment processors handle international credit card payments
Each independent payment processor selects its own pricing structure. To illustrate, desirable interchange-plus pricing lists the processor’s fees separately from the card networks’ interchange fees.
In contrast, some third-party processors frequently offer flat-rate pricing, which doesn’t break down the processing fee charges. They may profit from some credit card sales while losing money on other transactions.
These processors typically set their own cross border transaction fees and other additional fees. However, some third-party payment processors do not support any international transactions.
Making the best choice for your business
In any business scenario, it makes sense to evaluate the cost and benefit of a specific decision. Sometimes, if a merchant gains enough revenue from an international sale, the cross border fee may be a non-issue. At other times, maybe not.
Working with a budget-friendly payment processing company means the merchant saves money on every transaction. Payment Depot is a small business-friendly payment processor with membership-based pricing, no extra fees, and outstanding customer service. Contact our award-winning team today to learn how we can help your small business save more.